Anecdotally, it seems like the tide is slowly turning in respect of the activity levels in the debt markets. That said, activity seems to be concentrated in two main areas at the moment.
Firstly, many sponsors are looking for refinancings to bridge them to a period where interest rates may be at a more reduced state. The inherent issues with these types of financings are: (a) speed – can the refinancing be executed fast enough to keep in abeyance agitated incumbent funders? and (b) make-whole/yield maintenance timings – can you avoid significant refinancing costs when you want to refinance out this bridge with a lower cost option?
Secondly, we continue to see facilities being deployed with some kind of "value add" element – be that minor capex works, repositionings or full developments. This appears to be driven by a number of factors, including: stabilisation of building costs; a sense that this a good time in the cycle to be developing; various debt funds/challenger funders being well-placed to fund such assets; and a logical consequence that the only way you can beat an inflationary market is to create additional value.
In terms of what comes next, the recurring theme in the conversations up and down Le Croisette in MIPIM was that the market would not start to really take off until Q3/Q4 of this year. This has been said a lot in the past few years, and the concern is that this view may be coloured with positivity bias (that all of us in the transactional space are sometimes guilty of).
That said, I think there are reasons to be positive.
Interest rates will be coming down. The expectation is that there will be a cut in the summer and depending on how the market reacts to that, there will be further cuts down the line. It is also the current thinking of the IMF that rates will ultimately go down to pre-COVID levels. If we are operating in an environment where interest rates are seeming inexorably on the decline, then this will definitely change sentiment in the funding environment. Also, given that most sponsors have opted to hedge via cap arrangements rather than swap transactions, we will not have to deal with some of the same mark-to-market positions as we saw during the GFC.
Further, in the UK, we are heading, hopefully, into a period of greater political stability. This isn't a political article; however, it is worth pointing out that the view of some of our clients seems to be that the market has already priced in a Labour government and the pro-business/pro-investment rhetoric coming out of their campaign is encouraging to those writing risk papers.
On the flip-side, there is still nervousness regarding a global shock event. The various black swans that have appeared over the last few years have created that in-built fear. My sense is that until we have a prolonged period of "normality", that anxiety will mean that the breaks in the debt market may still be slightly depressed for a while.